Myth: Waxman-Markey gives away 85 percent of allowances to polluters

As the Waxman-Markey climate/energy bill nears a make-or-break vote in the House, those who work to improve it need more than ever to understand it first. Smart strategy is based on sound information. On that note: one of the central critiques of the bill is a red herring at best and at worst simply false.

Here’s the critique, which should sound familiar from endless media repetition: Waxman-Markey gives away 85% of emission allowances to polluters, instead of auctioning them like Obama wanted.

This, it is said, will enrich dirty-energy shareholders at the expense of consumers. It is evidence of the bill’s corruption by special interests; evidence that cap-and-trade is just the fiasco critics warned; evidence that Democrats are just as beholden to big corporations as Republicans. And so on.

Two problems with the critique: it asks the wrong question and offers the wrong answer.

The wrong question

By capping greenhouse-gas emissions, the bill transforms them into a finite commodity, thereby giving them monetary value. In effect, it creates a huge new pool of value, in the form of emission allowances.

How should that value be distributed?

On this subject, discussion has been dominated by the “allocation vs. auction” debate: should the government distribute the allowances or auction the allowances and distribute the resulting revenue? Allowance auctioning has taken on a kind of iconic quality — it’s become a rallying cry for progressives. I’ve indulged in that cry myself, more than once.

But ultimately it’s the wrong question. It just doesn’t make a ton of difference.

Imagine the government had a big pile of vouchers, each of which could traded in for $5. It could trade in the vouchers itself and distribute the cash, or it could just distribute the vouchers. Now ask yourself: is the mechanism — the system governing who trades in the vouchers — the most important policy question here? Obviously not. A voucher and a $5 bill are of equal value.

What matters in a cap-and-trade program is who receives the value of the allowances. Follow the money, not the mechanism.

(One note: Alan Durning makes the argument here that auctioning the allowances and distributing the cash is more transparent — that distributing allowances somehow hides what’s going on. But it’s not a secret who’s receiving the allowances; here’s a PDF laying it out. I don’t see why a procedural disagreement should be the central battle. Procedural issues don’t have a record of success rousing the public.)

The wrong answer

Now that we’re talking about the right thing — the value itself, rather than the procedural mechanism that produces it — let’s ask: who does get it in the bill? Is it really “polluters”? Is this bill nothing but a porkfest full of special interest giveaways?

The answer to that is a qualified no. The Lieberman-Warner climate bill from 2008 — that was a porkfest. It handed out allowances like candy, with no particular policy rationale aside from which constituencies had the most political muscle. Perhaps that bill colored media and public perceptions of cap-and-trade to the point that everyone’s just predisposed to see that dynamic at work no matter what. Once a storyline is established, it’s hard to uproot it.

But Waxman’s staff is a storehouse of incredible policy acumen, and the allowance distribution scheme in the bill, while certainly not perfect, is surprisingly policy-driven.

There are a variety of ways of breaking down the allowance allocations. Here’s how staff of the House Energy and Commerce Committee group the distribution in 2014:

Consumers: ~50%

Jobs & Competitiveness (i.e., industry handouts): ~23%

Clean energy and public purposes: ~25%

You can question those latter two categories. To some people (i.e., me), money for carbon capture and sequestration (CCS) looks more like an industry handout than a clean energy investment. There are other allocations you could frame differently.

Point is, roughly half the allowance value goes to consumers. Roughly a quarter goes to Clean Stuff like clean energy, prevention of international deforestation, adaptation, state efficiency programs, and the like. And roughly a quarter goes to Dirty Stuff like merchant coal generators, oil refineries, and trade-exposed, carbon-intensive industries like steel. Not how I’d do it, but not “giving away 85% of allowances to polluters.” The bulk of the value is going toward protecting consumers and transitioning to a clean energy economy.

Another way of breaking it down is to ask how much value will go to various purposes over the lifetime of the bill. Nat Keohane, an economist at the Environmental Defense Fund, has worked up some numbers based on EPA projections for the value of allowances. Here’s what he’s found (note that he categorizes things somewhat differently than above):

Households: $703 billion This includes the value returned to customers via electricity and natural-gas local distribution companies (LDCs), the tax credit and refund programs, and the climate-change consumer refund program.

Small business: $118 billion This includes the portion of LDC value that would be returned to commercial ratepayers.

Again, not how I’d do it, but not “85% of allowances to polluters.” Somewhere around 22% of allowance value is going to big, polluting industries over the lifetime of the bill. Given the amounts we’re talking about here, that’s a huge amount of money, but it’s nowhere close to 85%.

Other debates

I suspect it’s futile to say so, but this is not meant to cheerlead for the bill. There are plenty of legitimate debates to be had over how it’s structured. Some beefs:

I’d like much less allowance value given to polluters and consumers alike, and more devoted to investing in clean energy and efficiency.

The renewable energy and efficiency mandates (the RES and the EERS) have been mooshed into a Combined Efficiency and Renewable Energy Standard (CERES) and weakened to the point of uselessness. Separate them back out and strengthen them.

The soon-to-be-gargantuan carbon market doesn’t have the regulations in place to keep from entering the bubble-bust cycle so familiar in financial markets in recent years. (See Friends of the Earth’s “Subprime Carbon” report.)

I’m ambivalent about the strategy of using LDCs to get value to consumers, though I think Joe Romm’s contributors mount a pretty convincing defense. You need some way of accounting for regional disparities, and the dividend crowd hasn’t, to my knowledge, offered anything plausible.

Anyway, point is, these debates and many more are worth having. Yay for debate and dissent!

But lots of progressive time and energy are being devoted to what is effectively a fake controversy and a false charge against the bill. The bill is not entirely a pork party for polluters. It’s only a quarter pork party!

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